Why It Makes Sense to Defer Social Security Benefits

Oct 26, 2016

Article By: Scott Burns

Q. One of your columns using death-risk adjustments hit close to something I have been considering as my wife and I get closer to Social Security age. The common wisdom seems to be to wait as long as you can to start taking Social Security retirement benefits. That chestnut always seemed a little suspect to me.

I have attached a spreadsheet that uses the Social Security life table you may have used for your column. For males and females similar in income and education to my wife and me, taking Social Security early seems to be a valid option for much of the "active" part of retirement.

The higher the interest rate used in the analysis, the more biased the results were toward early claiming. For the male in this analysis, claiming Social Security at 70 was never the optimal strategy. What are your thoughts on this?

Also, can you point me to a good summary of the Social Security claiming strategies available to couples after the 2015 budget reconciliation act? ---S.L., Austin, TX

A. People with engineering and finance backgrounds often build spreadsheets to try to figure out when they should take Social Security benefits. Some assume taking the benefits and investing them, building a larger nest egg for the future.

The big mistake most spreadsheet builders make is to assume a high return, while forgetting about risk. Basically, they are comparing apples to oranges. The Social Security deferral deal is a risk-free investment. So you can't compare it to a guessed (and uncertain) stock market return of, say, 10 percent.

Others believe deferring benefits won’t work because they won’t live long enough to recoup the forgone income. What gets missed is that taking benefits may increase your tax bill, leaving less to invest or spend. It’s easy to assume deferral won’t work if you assume you’ll die young but most people will be assuming wrong.

I’m amazed at the number of people in their 60s who are eager to assume they will die in their early 70s. In fact, the average lifespan is much longer.

How do I know? The most recent National Vital Statistics Report, for instance, has male life expectancy of 20 years at age 62. The female life expectancy at that age is 22.8 years.

But if you can build a basic spreadsheet, you’re likely to be more educated than most people. Your income would likely be higher than most, too. That means you are likely to live longer than most. This makes deferral an even better “bet”--- and more valuable.

Another factor is that a simple deferral for one year brings an increase in benefits of eight percent (a bit less before age 66). Take the same amount of money from your investments and buy a life annuity from an insurance company and you won’t get an 8 percent payout. And the lower payout won’t be indexed for inflation, either.

Now consider another factor. Social Security deferral works best when interest rates are low.

The most secure benefit deferral “bet” is for a married male with a younger spouse who has earned less. When he defers benefits, he gets a higher benefit until he dies. His spouse, when widowed, gets the higher benefit until she dies. One person in the couple receives the higher benefit for as long as one is alive.

The life expectancy for a couple--- called a joint life expectancy--- is longer than the life expectancy for an individual person in the same couple. Here’s an example. A 65-year-old man or woman is likely to live about 20 years. But the odds are that one of them will still be alive for about 24 years. That makes deferral for married men a real slam-dunk.

The best source I know of on the complex rules for Social Security benefit claiming is Professor Laurence J. Kotlikoff at Boston University. Google his name and Social Security and you’ll find his articles on NPR, Forbes and other news sources. His firm, ESPlanner, Inc. also has a software program, “Maximize my Social Security.” I’ve coauthored three books with him and respect him immensely.

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